How do Islamic Mortgage Loans Work?

It is common knowledge, at least to every Muslim that Islam prohibits the giving and receiving of riba  (interest).  This has deterred many a people from taking mortgage loans from conventional banks. Because of this Islamic financial institutions have come up with Islamic home lending products that are Sharia compliant. It wasn’t until the late 90s that other banks joined HSBC Malaysia and the Islamic Bank of Kuwait in offering these kinds of products.

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Recently western banks and financial institutions have come to the realization that the Muslim market and products are worthwhile to invest in. European banks such as Lloyds TSB (The fifth biggest bank in England) and The Islamic Bank of Britain are the frontrunners in the European market. Few USA banks have also joined in like Devon bank. Islamic home loans now even consist of 40% of Devon’s loan businesses showing how popular these Islamic products are becoming.

Even non-Muslims like Buddhists and Sikhs are queuing up to get Islamic mortgage loans because they see it as a more ethical way of doing business than conventional mortgages.

Murabaha Islamic Home Loans

Murabaha is a type of mortgage transaction whereby the bank or financial institution doesn’t give the customer a loan to buy a house instead the bank buys the house on its own (at a price disclosed to the end buyer) then sells it at a profit to the customer. The customer is usually required to make a huge down payment of about 10%-30% or provide a good collateral. The buyer can move into the house as soon as possible with the house also being registered in his name. The bank and the buyer can the agree on a mode of payment but this is without interest of any sort.

Ijara or “Decreasing Rent” Scheme

This is an Islamic home purchasing scheme that is common with Islamic banks in the west. Like the Murabaha, the bank purchases the property and then resells it to the buyer at a profit but unlike the Murabaha the property in is the name of the bank until the total amount is paid by the buyer. The buyer can move into the house immediately while still paying off the amount to the bank. The buyer also pays rent in addition to purchase price.

But as time goes and the buyer pays more of the purchase price, his share of the house increases and the rent price also decreases. Eventually, he takes up ownership of the house and the property is in his name.

Challenges of The Islamic Home Purchase Schemes

In Britain for example, because the home is bought and sold twice this also means that stamp duty must be paid twice. The costs of which is transferred to the end buyer.

In the USA where tax breaks are given by the government to those that pay mortgage interest, the buyer of Islamic home misses out because there is no traditional loan or interest.

However this not a problem for the wealthy and those Muslims who are eager to avoid interest-based loans and concentrate on Sharia compliant ones. They are just glad that there are Islamic products in the Market.

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